PropTech Spawns New Business Models

Last month, we explored the smart building (PropTech) applications that enhance occupant experience, comfort, productivity and space utilization. Now, let’s take a look at how technology is enabling new business models.

Energy guru Amory Lovins famously said, “People don't want raw kilowatt-hours or lumps of coal or barrels of sticky black goo. They want hot showers, cold beer, comfort, mobility, illumination. It's like when you go to the hardware store looking for a drill. What you really want is not a drill but a hole.” He gets right to the heart of the concept for “as-a-service” business models that are disrupting the commercial real estate industry and enhancing sustainability at the same time. These models allow organizations to pay for the service they desire (the hole) rather than the physical thing the service is derived from (the drill).

A prime example of this is the emergence of “space-as-a-service.” Businesses large and small want flexibility in providing productive work environments for their employees, rather than the rigidity of five-plus year lease commitments for fixed amounts of square footage. WeWork is the preeminent provider in this arena, serving everyone from sole proprietors just starting up to established global corporations needing flexible expansion space. The space-as-a-service model provides an integrated ecosystem for workspaces across multiple geographies, and can more effectively deliver the flexible work environment, community, amenities and seamless user experience that employees desire. Because this model operates on a larger scale, it can more efficiently deliver energy and resource conservation and health and wellness benefits than would be feasible for each of the companies that make up the membership of the co-working space provider. While the physical infrastructure of each space is important, technology underpins the user experience of businesses and their employees, with applications facilitating flexible lease terms, payments, business services and on-the-go booking of conference rooms and work space in other cities while traveling.

Other as-a-service prototypes are more focused on energy and building performance. The solar power purchase agreement (SPPA), a renewable energy-as-a-service model, has been around for over a decade and has enabled broader adoption of solar energy despite constrained capital budgets. In a SPPA, a solar provider leases the roof of a building and installs a photovoltaic solar array. They collect all available incentives and tax credits and recoup their investment by selling the energy produced by the array to the building owner at a fixed kilowatt-hour rate (usually lower than retail utility rates). The long-term agreement transfers with the sale of the building, and includes equitable terms for the transfer of ownership of the array at the end of the contract. The building owner benefits by avoiding the initial capital expense of installing an array, gets a hedge against utility rate increases, and can market to tenants that the building is powered by renewable energy.

More recently, advances in smart meter technology supported the net-positive energy achievement of the Bullitt Center in Seattle. Collaboration between the Bullitt Foundation and Seattle City Light (the local municipal utility) created a prototype for an energy efficiency-as-a-service business model. The project pioneered the Metered Energy Efficiency Transaction Structure (MEETS) championed by the MEETS Coalition to provide the occupant comfort and energy efficiency as a service that was central to the Bullitt Center’s Living Building Challenge Certification.

MEETS directly addresses several of the key barriers to achieving and maintaining energy use reductions in commercial buildings. These include the split incentive where developers/building owners bare much of the cost of efficiency improvements, while tenants reap most of the benefits, and owner issues with the timescale for capital recovery from investments in efficiency. The MEETS structure works roughly as follows for both new construction and deep energy retrofits, providing benefits to all parties involved:

An energy tenant enters a long-term rental agreement with the building owner. Using “patient” capital from an outside investor, they install and maintain an integrated set of energy improvements in the building, using standard tenant improvement accounting. The energy tenant then harvests and sells the energy efficiency from improvements to recoup the investment.

A dynamic all-fuels meter measures both baseline (energy use if building just met code) and actual energy use and reports the difference as the metered energy efficiency. An independent third-party company collects and reports meter data to the utility in a transparent and auditable fashion.

The utility has a long-term contract to buy metered energy efficiency from the energy tenant. The utility then charges the building at retail rates for traditional energy and metered energy efficiency (the baseline energy use).

The energy tenant pays a portion of the revenue to building owner as rent. The owner incurs no costs, but receives benefits in two primary ways. The improvements enhance the marketability of the building to tenants (comfort and sustainability), and this plus the energy tenant rent boosts net operating income which in turn increases the residual value (at time of sale).

The traditional building tenants get greater comfort, with no other noticeable changes or increased costs.

A key part of the value proposition for utilities from MEETS is the ongoing verification of metered energy efficiency. Utilities benefit from energy efficiency incentives because the “negaWatts” they purchase typically cost less than building new generating capacity to meet growing demands. However, incentives are based on projected energy savings and do not always translate to actual and sustained savings over time. Based on the success of the Bullitt Center pilot, Seattle City Light recently received regulatory approval for expansion of its Energy Efficiency as a Service (EEaaS) program. This will likely provide greater proof of concept and drive the adoption of MEETS in other locations.

These as-a-service models are just a few illustrations of ways PropTech is spawning new ways of doing business in the buildings industry. Other models include Katerra’s deployment of technology to disrupt traditional design and construction practices by creating end-to-end efficiency in the process (standardization, procurement, robotic prefabrication, etc.), and the emerging applications of blockchain in areas like property transactions and “smart contracts.” While not all attempts will stick, those that improve user experience, comfort, efficiency and profitability will certainly continue to transform the way we design, build and operate our built environments.

Alan Scott, FAIA, LEED Fellow, LEED AP BD+C, O+M, WELL AP, CEM, is an architect with 30 years of experience in sustainable building design. He is a senior associate with WSP in Portland, Ore. To learn more, visit www.wsp.com/en-US/services/built-ecology and follow Scott on Twitter @alanscott_faia.